Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first examine what you'd want to see from a perfect stock, and then decide whether Intel (Nasdaq: INTC) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Intel.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 2.4% | Fail |
| 1-Year Revenue Growth > 12% | 24.2% | Pass | |
| Margins | Gross Margin > 35% | 66.1% | Pass |
| Net Margin > 15% | 26.8% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 4.3% | Pass |
| Current Ratio > 1.3 | 3.48 | Pass | |
| Opportunities | Return on Equity > 15% | 25.6% | Pass |
| Valuation | Normalized P/E < 20 | 12.22 | Pass |
| Dividends | Current Yield > 2% | 3.4% | Pass |
| 5-Year Dividend Growth > 10% | 14.5% | Pass | |
| Total Score | 9 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With nine points out of 10, Intel comes as close to a perfect score as we've seen. Its sole blemish, though, exposes one of the only fears investors have about the semiconductor juggernaut.
Intel has long held a near-monopoly on the processors that run PCs. With primary rival Advanced Micro Devices (NYSE: AMD) having recently lost its CEO under questionable circumstances, and now facing an uncertain future, Intel might seem well-positioned to continue its dominance.
But the company isn't keeping up in the fast-growing, competitive tablet and smartphone market. With Microsoft (Nasdaq: MSFT) reportedly working on a version of Windows that will run on a different chip architecture developed by ARM Holdings (Nasdaq: ARMH), Intel is facing a potentially deadly attack from a new direction. And with customers lining up behind ARM to invest in its technology, that threat could be right around the corner.
Moreover, just yesterday, Intel announced a recall of the chipsets for its Sandy Bridge processor, which combines graphics and CPU functions in one chip. That stands to be the most expensive recall in its history, and customers who use the chip, including Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ), may be less likely to go back to Intel, even if they don't directly pay for the cost of the recall.
So even though Intel seems to be close to a perfect stock, the company still has to maintain its position. Otherwise, it could easily fall off the pedestal in the years to come.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Editor's note: This article has been updated to clarify the recall is for Sandy Bridge chipsets and not the processor itself.
Click here to add Intel to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
